Sterling hovered near a seven-year high against a trade-weighted basket of currencies on Thursday as investors grew more confident that the Bank of England could start raising interest rates sooner than many had been anticipating. The pound rose 0.2 percent against the dollar to $1.5733, while against the euro it gained around a third of a percent to 71.14 pence. The euro had fallen to a four-week low of 70.805 pence on Tuesday, and worries about whether Greece will default on its loans continued to limit investor activity.
On a trade-weighted basis, sterling was at 93.1, having hit a 7-year high of 93.5 on Wednesday. "Markets continue to bring forward rate hike expectations, with some speculation (BoE Governor) Mark Carney too will strike a hawkish tone at a Friday speech," Citi currency strategist Josh O'Byrne said. The shift in market expectations of the first rate hike to the first quarter from the second happened last week after data showed British wages grew at their fastest rate for nearly four years in April.
The currency had bounced around in the first few months of this year, weighed down by worries over national elections in May, which in the end produced the stable, right-leaning government financial markets most wanted. It has since gained almost 5 percent on a trade-weighted basis. Yet there are risks lurking that could hurt investments and the currency, especially political risks in the form of a referendum about whether Britain wants to stay within the European Union or not.
EU leaders begin a summit on Thursday and the fast-approaching UK referendum will be among its main topics. British Prime Minister David Cameron is expected to present his demands as part of plans to renegotiate Britain's membership with the EU. It will mark the formal start of Britain's latest renegotiation of its ties with Europe, though Cameron is expected only to give a brief outline.
"It is not a major mover at the moment but if Britain were to exit it would also bring back to the fore the debate on the UK internally, Scotland in particular," said Hans Stoter, chief investment officer for Dutch asset manager National Nederlanden Investment Partners. "The implications for Britain would be quite significant. But I think what we will eventually get is a whole lot of talk and then we (the UK) stay in."